Due Diligence When Your Facility Is Being Sold
By Vince Toenjes
The on-site manager is critical to the company’s day-to-day success. When the owners of the facility decide to sell, the operations team should engage with the manager early on in the process to add value to the transaction.
The Diligence Process
It is the buyer’s responsibility to investigate the physical, financial, and legal condition of the facility it wants to purchase. The buyer wants a property that fits its needs and, in many cases, that its lender is willing to finance. When the purchase contract is signed, the buyer has a period (usually at least 30 to 45 days) to investigate the most important issues about the property’s condition. A list of what the buyer can investigate during its diligence period will be described in the purchase contract, but almost always includes:
1. A physical inspection of the facility;
2. An environmental study of the property;
3. A review of the rent rolls and space leases (or at least a sampling of them), including any leases for unusually large spaces or for terms longer than month-to-month;
4. A review of the contracts, such as those for property maintenance, that will remain in effect following the closing;
5. A review of litigation or threatened litigation against the seller; and
6. A review of a property survey and title matters.
The operations team should connect with on-site managers early on in the process to make sure they understand the scope of the buyer’s diligence activities and what role the managers will play. The company should have a carefully considered plan to address the following issues:
1. Candid Communication. While it’s not necessary to disclose all details of a potential sale to the on-site manager, it also rarely pays to keep him or her in the dark. Be as forthcoming as possible about the transaction. The seller should control the message to its employees and reduce the negative impact of rumors.
2. Avoid Surprises. Virtually every storage operation has at least a small list of unresolved problems such as defaulting customers, disputes with vendors, hazardous materials, or deferred maintenance. The manager and the operations team should spend time thinking about existing and potential problems and document those for the seller’s legal team. The legal team will then decide whether those items must be disclosed to the buyer. Providing too much information to your legal team is preferable to having to answer why something wasn’t disclosed.
3. Prepare. The manager can add value by making the site as attractive and organized as possible. Start early by organizing files and business records and having staff spend extra time cleaning the site. The operations team should also work with senior management and counsel to ensure that the on-site manager has clear direction about providing the buyer’s inspectors with appropriate access, including what information should not be shared with the buyer.
Well-prepared and informed on-site managers can reduce the time to close and add value to the sale.
Vince Toenjes is senior counsel with Weissmann Zucker Euster Morochnik P.C.